Have Structural Changes Eliminated the Out-of-Sample Ability of Financial Variables To Forecast Real Activity After the Mid-1980s? Evidence From the Canadian Economy

Akhter Faroque (), William Veloce () and Jean-Francois Lamarche ()
Additional contact information
Akhter Faroque: Department of Economics, Laurentian University
William Veloce: Department of Economics, Brock University

No 910, Working Papers from Brock University, Department of Economics

Abstract: The paper evaluates the reliability of the information content of individual financial variables for Canada's future output growth. We estimate the timing of structural changes in linear growth models and check robustness to specification changes, multiple breaks, and business cycle asymmetry. Our out-of-sample forecast evaluation using the MSE-F and the ENC-NEW tests show that the leading information content of most financial variables has deteriorated after 1984:4, but the 1-3 year term spread exhibits a consistently reliable predictive ability at the 1 and 2 quarter horizons and has significant forecasting ability at the 8 quarter horizon. Also, the real M1 money growth has regained its ability to forecast output growth since 1991:1.

Keywords: Financial indicators; structural change; nested model forecasts; minimum MSFE; encompassing tests (search for similar items in EconPapers)
JEL-codes: C52 C53 E44 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2009-12, Revised 2010-10
New Economics Papers: this item is included in nep-fdg and nep-for
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Citations: View citations in EconPapers (2)

Forthcoming in Applied Economics

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https://brocku.ca/repec/pdf/0910.pdf First version, 2009 (application/pdf)
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Related works:
Journal Article: Have structural changes eliminated the out-of-sample ability of financial variables to forecast real activity after the mid-1980s? Evidence from the Canadian economy (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:brk:wpaper:0910

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